An operating agreement is a contract that controls your LLC’s operations as well as member interaction with each other and with the LLC. You may think that an operating agreement is not necessary for your single-member LLC – after all – why make an agreement with yourself?
Is the Operating Agreement a Legal Requirement?
No, Florida, like most states, does not, legally require an LLC to have an operating agreement. Of the states that do, some require the operating agreement be written while others allow oral agreements. No state requires an LLC to file an operating agreement with the Secretary of State; instead, the operating agreement is kept with other business records. No matter what state you’re in, however, it’s always a good idea to create a formal, written operating agreement—even for a single-member LLC. Here’s why:
REASON 1 – Avoid State-Imposed Default Rules
Without an operating agreement in place, your LLC is bound by the default rules of your state. Our “Florida Revised Limited Liability Company Act” is the law that governs all Florida LLCs, and contains a LOT of rules that may not work very well for you. However, the same Act explicitly allows its default rules to be overwritten by an LLC’s operating agreement.
REASON 2 – Maintain Control
As the business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business-development opportunities. An operating agreement can define the manager role—designating the authority and compensation and what happens if the manager leaves or competes with the company.
REASON 3 – Keep Business and Personal Identities Separate
An operating agreement helps distinguish the business from the owner for liability purposes. This is critical from an asset protection standpoint. A major benefit of an LLC is that it limits liability going both ways: the LLC protects a member from business liabilities and the business assets from a member’s personal liabilities. Without an operating agreement in place, the business may look like a sole proprietorship. If a court doesn’t see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers.
REASON 4 – Clarify Succession
An operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down.
REASON 5 – Scalability
Successful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement now, the LLC will be better positioned in the investment negotiations.
Let’s Continue this Conversation
An operating agreement serves an important role, even for a single-member LLC. The operating agreement puts you in the driver’s seat and enables the LLC to perform its main task—to limit liability.
If you have an operating agreement in place, we’d be happy to review the agreement as well as your business needs to ensure the operating agreement and LLC are in sync. Or, if your single-member LLC doesn’t have an operating agreement in place, we’ll work with you to craft an appropriate agreement.
We, here at The Law Office of Brandon Woodward P.A. are glad that you’ve taken the time to visit our website or read our blog. The materials and information contained here are provided for informational purposes only and are not to be considered as legal advice. For questions about LLCs, operating agreements, startups, contracts, founding documents, corporate agreements, business entities or any other legal issues facing your business, EMAIL US, and we’ll set up a consultation.